To track the intended -- and more importantly, unintended -- consequences of policies,market movements,buyout deals and regulatory censure. This forum will map the multiplier effect of what may seem minor events initially but spread out far and wide.

11/19/2010

How come everybody and everything other than the domestic US economy is reacting to QE-2?

The US Federal Reserve will sooner than later be in need for a crisis communication team. No matter what they do or don’t do, there is someone out there to ready to bite them for having done too much or too little.

Their latest round of buying bonds and pushing money in people’s hands called ‘quantitative easing’ and nicknamed QE-2, lays out this premise perfectly. Let’s take a quick look at all the unintended outcomes that the Fed did not sign up for:

1. Protectionist sentiments globally are leading to non-tariff walls. The backlash from international community has been storied to death by now but that is not the end of it. Once these countries are done ranting, they are going to begin acting, take compensatory measures and that’s when the protectionist tone of this backlash will begin to bite. Brazil, which saw a massive appreciation in its real in 2009, has already a transactions tax on capital inflows in place. It raised this tax recently. Thailand has also imposed a tax on foreign holders of domestic securities while Philippines and Indonesia are believed to be considering imposition of capital inflow controls. Such walls will block off some of the hot money that is washing up their shores but create barriers.

2. Fresh from their victory paint in the November mid-term elections, the Republican’s whipping of the monetary policy, to the extent of clipping the central bank’s three-decade old dual mandate (http://www.washingtonpost.com/wp-dyn/content/article/2010/11/16/AR2010111606151.html ) to merely inflation management and staying off efforts at employment generation, is stinging and unprecedented. Hard to believe either Fed chairman Ben Bernanke nor his officials would have pencilled that in as a consequence while chalking out QE-2.

3. There are possible winners too but they are as unintended recipients as they could be. While the governments and their central banks are crying hoarse about possible asset bubbles – dollar pumping by the Fed is increasing capital inflows to the high yield developing countries and stoking asset prices – it is giving companies in these countries to lock in huge capital at good rates.

A string of mega-IPOs – Petronas Chemicals’ $4 billion, Malaysia’s largest; Coal India’s $3.5 billion offering which would be India’s largest; Global Logistic Properties’ $3 billion in Singapore and AIA’s planned IPO of $21 billion in Hong Kong – that have just hit the market or are in the fray stand to benefit hugely from Fed’s gravy train especially if it ends up spilling the dollar curry outside US. And that seems like a very real possibility.

And the worse part: Fed’s own officials admit that the impact of QE-2 on what it’s actually aimed at – the only intended consequence of spurring growth in the economy – may not fly too far. New York Fed President William Dudley in a recent interview to CNBC said the critics were “off-base” but agreed that that the asset purchases would not have "a huge powerful effect on the U.S. economy."

Hmm…okay, so how come QE2 is doing everything else except what it is supposed to do!??